Revenue, Expenses, and.... no Profit?! Oh, My!

I was asked by a good friend (I can call you that, right?) if I would be so kind as to write a post on P&L's - aka Profit & Loss statements, Income Statements, or Statement of Operations for all y'alls that are unfamiliar with cool accounting lingo. Who am I to pass up such a bodacious request?!

Let's start simple - (a very fine place to start) - let's start with... income. You know you love it - Say it with me! "Show me the money! Woot Woot!" (I think the editors cut part of that in the movie, but I'm not totally sure). Most people think of income as their hourly (or salary) wage.

For example:
If you were to make $10 an hour, and you worked 40 hours in a week, would you get $400 in your paycheck? Heck no. "Well, Mr. 'Numbers Guy' why is that?" Well, it's easy. Your paycheck is a basic example of a P&L. The absolute basics of a P&L are...(drumroll please)...

Revenue (Your 10 big ones for every hour of your life that you give to your boss)
- Expenses/Cost of goods sold (The portion of your hard-earned money that Obama gets to waste)
= Gross Profit
- Operating Expenses (any pre-tax deductions like retirement or insurance)
= Net Profit (What actually goes into your bank account to buy some bling-bling)

Now, in the confusion of all this edumacation, the thing I want to get across the most is the difference between Gross Profit and NET Profit. Is there really that big of a difference?! Oh ya, baby. Lemme splain. If I were to say to you "Hey, I'm in charge of casting the movie on the history of the New Kids on the Block and thought you'd make a great Joey." You'd say, "Dude, that's totaly rockin' rad! I know it'll make a ton of cazash!" (or whatever it is you kids say these days). Then I tell you the best news EVER - "I'm prepared to offer you the most lucrative deal in the history of NKOTB movies - 25% of the net income." You sit in silence as you contemplate all the slap bracelets and trapper keepers you could buy with that kind of scratch.

We make the movie - it's wildly successful - and I send you on your way with the promise that I'll mail you a check whenever we realize a net profit. You can hardly wait to get your hands on a sweet new walkman. Only problem - I never send you money, and you never get to listen to Madonna sing "Material Girl" while walking down the street. Why?! Well, unfortunately, with all the expenses of the movie (including my awesome salary of every penny that isn't spent somewhere else) we never realized an ultimate profit. You fell for the oldest trick in the BOOK! Never, never, never make deals based on Net Profit. Always go for Sales or Revenue - that way it's up to the company to control their other expenses and you get to go on your merry way.

Now, for those of you that think this scenario is a bit far-fetched... just ask David Prowse. He's the guy that played Darth Vader in Return of the Jedi. He signed a contract just like this - and because Return of the Jedi hasn't made any money yet (because of George Lucas's sweet salary), he hasn't been paid a dime. Doh!

Now, make me proud and go make some net profit!